[financedfuture]

>We are always wary of guiding for mean reversion. But, if we are wrong and high margins manage to endure for the next few years (particularly when global demand growth is below trend), there are broader questions to be asked about the efficacy of capitalism.

This isn't a criticism of capitalism.

This is an acknowledgment our current "capitalist" financial system isn't able to produce "capitalism" itself.

[themagician]

A lot of Americans are obsessed with "capitalism" and "the free market", but don't even understand the basic assumptions that must be true for free markets to work like perfect information, interchangeable goods and services, and a lack of market power for any single entity. Like, the basic—the most basic—assumptions.

Capitalism has become synonymous in the collective mind with "don't make laws, laws are government interference and socialism." Just look at the way people on the right talk about removing Obamacare and letting the "free market" do its thing. But the healthcare industry basically NEVER met the assumptions necessary for a free market to exist in the first place. The same is true in banking, albeit some might argue to a lesser extent.

You've got oligopoly or monopoly firms in many industries that are "too big to fail", have near total market power, and make many decisions (some around pricing) behind closed doors or with little transparency (let alone anything close to complete information), and then expect markets to run efficiently? You can't bake the perfect cake if you don't have any of the ingredients in the first place.

[goodcanadian]

A little rant that I have been saving up:

"Capitalism" is not the same thing as "free market" is not the same thing as "laissez faire."

A "free market" means lots of buyers and sellers participating on even playing field. Even Adam Smith acknowledged that government regulation is necessary in order to ensure that the market remains free. When people argue for the removal of laws and regulation, they are actually arguing for laissez faire economics which, in a nutshell, means for the government to stay out of it. Left to their own devices, however, capitalists will naturally (and rationally) try to tilt the playing field in their favour. Capitalism, for what it is worth, is people investing their free capital into economic enterprises in order to glean a return.

So, I am, actually, a strong proponent of capitalism operating under free markets. I am against capitalism, however, under a completely laissez faire economy.

[vezzy-fnord]

A "free market" means lots of buyers and sellers participating on even playing field.

I've never seen this definition used before. Even playing field is a grossly inappropriate and unattainable normative ideal. Even playing field means homogenization, which is completely antithetical to a market as a vehicle for coordinating entrepreneurial plans, necessarily implying imperfections and heterogeneity.

Even Adam Smith acknowledged that government regulation is necessary in order to ensure that the market remains free.

Regulation is certainly necessary, at least in the sense of property rights enforcement and dispute adjudication. Government regulation it need not be, and it need not be anything more than a minimal legal institutional framework.

Left to their own devices, however, capitalists will naturally (and rationally) try to tilt the playing field in their favour.

How did you reach this conclusion? It makes no sense whatsoever. If anything, we would expect this behavior to occur only where there are large amounts of government regulation. That is to say, when there is more opportunity to exploit the political method over the economic method. Otherwise, how will they tilt the playing field? By forming cartels? Those are brittle. Any attempt at trying to use market power leaves you vulnerable to undercutting in some way in the absence of special privileges.

I am against capitalism, however, under a completely laissez faire economy.

Your taxonomy is worthless.

[xg15]

> Even playing field means homogenization, which is completely antithetical to a market as a vehicle for coordinating entrepreneurial plans, necessarily implying imperfections and heterogeneity.

There is a difference between random variations and the extreme differences in capital and power we have right now.

The benefit that a free market is expected to give to society is, as far as I know, that it will cause a "survival of the fittest" scenario in which the best solutions for a problem gain widespread acceptance and bad solutions die out. But that of course only works if there is actual competition - which in many fields isn't the case in our current situation.

> Otherwise, how will they tilt the playing field? For example by becoming powerful enough that you can control certain market segments instead of just being a player. This power can be reached by becoming a de-facto monopoly in another related segment. One example of this are smartphones and the "app economy". Apple and Google provide OSes of the vast majority of smartphones on the planet - this gives then the power to create their own controlled markets for apps. No government interference necessary, yet if Google decides tomorrow to block your app to protect their own competing product, you couldn't do anything about it.

Similar thinks can happen with large-scale accumulation of property. You agree tgat property enforcement is necessary - but if one entity owns enough property, then even the simple enforcement can be a tool to stifle competition. (See the problems with patents and intellectual property)

[vezzy-fnord]

The benefit that a free market is expected to give to society is, as far as I know, that it will cause a "survival of the fittest" scenario in which the best solutions for a problem gain widespread acceptance and bad solutions die out.

Not at all the case. You're injecting Social Darwinist assumptions. The benefit of a free market is in having individuals coordinate their plans most efficiently based on their subjective preferences and valuations, with prices as an epistemic vehicle for conveying notions of scarcity, opportunity for arbitrage or other criteria. It is thus a continuous and dynamic disequilibrium process that one cannot anticipate through outside observation, as optimal outcomes are by definition always being revised, renewed and discovered endogenously.

But that of course only works if there is actual competition - which in many fields isn't the case in our current situation.

Competitiveness is one aspect, but a much more important one is constestability. Free markets are by definition ones allowing for the greatest degree of it. And I absolutely agree that our current situation is far from optimal. We are not discussing our current situation, however. Monopolies are a multifaceted subject, many of them based on rents obtained from IP law and hardly "natural".

Similar thinks can happen with large-scale accumulation of property.

There are things called diseconomies of scale that put upper bounds on the profitability and viability of being too big. Economic calculation issues set in, principal-agent inefficiencies, coordination problems and so forth. It is only through the subsidy of an exogenous body such as government that one can hobble along in inefficacy for exorbitantly long times.

[goodcanadian]

I've never seen this definition used before.

I don't know what to tell you. The definition (admittedly paraphrased) comes from Adam Smith. The gist is that anyone can freely participate in the market on an equal or fair basis without artificial constraint. There is sometimes a need for strong regulation to prevent larger participants from using their size to gain an unfair advantage in the market.

Government regulation it need not be . . .

Can you give me an example of effective non-governmental regulation that doesn't ultimately derive its authority from the government?

How did you reach this conclusion? . . .

I am currently reading a book about the so-called "Robber Barons" of the later half of the 19th century. If you want to see what truly unconstrained capitalism looks like, I suggest you read up on this period: fraud, price-fixing, market manipulations, extortion, bribery . . . they even resorted to armed conflict with their rivals on occasion. The fact that capitalists continue to try to exploit any advantage that they can in the face of strong regulation is precisely my point. Heck, even in my own comparatively small investments, I seek to exploit any advantage that I can. It is not rocket science; it is acting in one's own best interest. The job of regulation is to ensure (as much as is reasonably possible) that no one gains an unfair advantage.

I've talked a lot about regulation, so I want to make clear that I am not in favour of endless reams of red tape. Regulation should be as complex as it needs to be, but no more complex. What regulations there are should be strongly enforced. The current reality does not really live up to this ideal; there are many ineffective or unnecessary regulations, and there are regulations that are missing entirely. Nevertheless, I am talking about an ideal vision that we should strive toward.

[vezzy-fnord]

There is sometimes a need for strong regulation to prevent larger participants from using their size to gain an unfair advantage in the market.

The Coasian revolution and public choice schools have since challenged this narrative quite significantly, and have had an impact on economic discourse, though not on mainstream discussion.

The job of regulation is to ensure (as much as is reasonably possible) that no one gains an unfair advantage.

George Stigler devastated that interpretation, as well.

Nevertheless, I am talking about an ideal vision that we should strive toward.

Indeed, this is an ideal discussion. Hence I can't give you a straight example of a "non-governmental regulation that doesn't ultimately derive authority from government," though in fairness this is ambiguous. It happens that the judicial branch is governmental, but the very act of informal bargaining between property owners is endogenous, non-governmental regulation. You could also argue that private certification and standards agencies are endogenous regulators.

I am currently reading a book about the so-called "Robber Barons" of the later half of the 19th century. If you want to see what truly unconstrained capitalism looks like, I suggest you read up on this period: fraud, price-fixing, market manipulations, extortion, bribery

The so-called "robber baron" era was not one of truly unconstrained capitalism at all. The "robber baron" era had the strict mercantilist and interventionist policies of Alexander Hamilton, Friedrich List and the American School economists in full effect. Above all, it was driven by a complex interaction of tariffs (people keep forgetting how important tariffs were in United States history), land law acts and railroad subsidies, with heavy political collusion.

After you're done with that book, I suggest you read Gabriel Kolko's Railroads and Regulation, 1877-1916 to get a fuller picture. Ironically, the author was a member of the New Left.

[nikdaheratik]

>The Coasian revolution and public choice schools have since challenged this narrative quite significantly

And yet, Microsoft in the 90s and early 00s still happened. And there doesn't seem to be anything in what you've said that would demonstrate that we no longer need anti-trust laws (which are one form of regulation).

>The so-called "robber baron" era was not one of truly unconstrained capitalism at all. The "robber baron" era had the strict mercantilist and interventionist policies of Alexander Hamilton, Friedrich List and the American School economists in full effect.

A "No True Scotsman" response at its finest. But it doesn't really respond to the point: removing regulation without putting some other constraints into the market is basically asking for a return to the 19th century market. And no one has come up with something that really works any better than regulation for many of these areas of the market.

>I can't give you a straight example of a "non-governmental regulation that doesn't ultimately derive authority from government," though in fairness this is ambiguous.

But, again, the entire point is that lassez faire supporters can't even give an "ideal" replacement for the government's role in regulation, consumer protection, anti-trust, or even dispute settlements that doesn't basically do exactly the same thing as government. Only being less transparent, and more costly to new players in a market (e.g. "binding arbitration").

[bigger_cheese]

Personally I think the major problem with capitalism is it ignores sustainability and assumes there is always an unlimited potential for growth when in reality we live on a planet of finite resources. Growth isn't a bad thing but unsustainable growth is. When the system is geared around maximizing profits it leads to a drive to dig up more, consume more and emit more at the lowest cost and damn the consequences.

Thus you get things like Sweatshops, Ok Tedi disaster etc.

Without regulation there's a good chance we'd still not have catalytic converters, we'd still be living with CFCs, Asbestos and DDT. I'm sure you can think of a dozen other examples the market has repeatedly shown it is not capable of regulating itself.

[zardo]

when in reality we live on a planet of finite resources

There's an awful lot of matter and energy in our lightcone, there's no fundamental reason we can't keep growing for millions of years.

[ancap]

>But the healthcare industry basically NEVER met the assumptions necessary for a free market to exist in the first place.

Please expound on the history of this (the "NEVER" part)and also enumerate on what the "assumptions necessary" are.

>Just look at the way people on the right talk about removing Obamacare and letting the "free market" do its thing.

Obviously the removal of Obamacare would be insufficient to produce a free market in health care and it would take a lot more repealing of laws (many at the state level) before a free market could "do its thing".

>Capitalism has become synonymous in the collective mind with "don't make laws, laws are government interference and socialism."

I'm not so sure there is any majority which claims this. I find much more common the idea that most of society's problems are caused by capitalism, caused by a "market failure", or that free enterprise is insufficient to resolve said problem and the only solution is government action.

[themagician]

With the exception of Kaiser and a few other smaller providers, pricing in healthcare is completely opaque. Consumers can't make informed decisions because they essentially have no information. In most cases if you call a provider and ask what the price of something is they can't tell you. It's a myriad of "what insurance you do have" and "it depends".

[ancap]

I would suspect that was not the case 50 years ago. There are plenty of "medical tourist" destinations where you can go to get a very complicated medical procedure done and they will tell you exactly how much it will cost before hand.

From a U.S. physician's perspective, knowing what insurance you have is obviously going to be a prerequisite to estimating the cost (unless its one of the rare doctors who accepts no insurance). Different insurances cover different things, different providers, different procedures, different prescriptions, then there's the issue of deductibles, contracted costs, etc. It's a complicated mess, and while I don't know enough about the laws affecting health insurance companies and doctors, I would suspect there are regulations which exasperate the problem. Clearly Obamacare (mandating everyone have insurance) is not going to fix the problem.

[kbenson]

Perfect information is not required for a free market. Market efficiency is related to information availability though. That is, perfect information and zero cost transactions are some of the requirements for a maximally efficient market, but a market can be "good" or "good enough" to outperform other systems without perfect information (which is impossible), or zero cost transactions.

[raverbashing]

True

I think that Healthcare would solve 95% of its problems with a truly Free Market, but to have that you need a very strict law enforcing fair and transparent rules to all (like mandatory transparent pricing), elimination of bottlenecks (like MD graduation and facilitate hiring from overseas), liability and regulation limitation and other things.

[themagician]

You will never get there. It's just unrealistic. There are products that are too specialized and have no competition. There are long term contracts that prevent all sorts of efficiencies. There are parts of the supply chain that operate on timelines measured in decades.

[raverbashing]

Everywhere else works better

> There are long term contracts that prevent all sorts of efficiencies.

Yeah, then those who signed those contracts will be less efficient, and maybe go bankrupt. That happens in several cases, not limited to healthcare

[themagician]

You really don't want necessary healthcare companies going bankrupt on a regular basis.

Perhaps healthcare could be efficient on a long enough time scale. When we all live to 1,000 years old maybe it won't matter so much.

[vezzy-fnord]

"Perfect information" is an assumption used in static Paretian general equilibrium models, but it does not reflect any existing dynamic reality, and it is not at all a necessary prerequisite for free markets. Market power is vulnerable. "Interchangeable goods and services" - I honestly have no idea how you could come up with such a delusional prerequisite.

You seem to have confused neoclassical models for an attainable ideal compatible with empirical reality. But our world is one of disequilibrium, dispersed knowledge, plan coordination - ones most apt for a market and a free one at that. You are completely out of vogue.

[zacharytelschow]

> But the healthcare industry basically NEVER met the assumptions necessary for a free market to exist in the first place.

Has it occurred to you that regulation might have something to do with that?

[clock_tower]

But what's the alternative? Even physicians haven't consistently self-regulated -- and if you don't have regulation, you get incompetent amateurs and snake-oil salesmen (like the contemporary sellers of homeopathic cures) passing themselves off as doctors and defrauding the sick.

[Analemma_]

> This isn't a criticism of capitalism.

> This is an acknowledgment our current "capitalist" financial system isn't able to produce "capitalism" itself.

That's a No True Scotsman argument intended to shield capitalism from any criticism. "The system isn't working? Then it must not be real capitalism."

[financedfuture]

No.

That's about recognizing there would be no mean reversion, a great indicative of the existence of crony monopolies and, therefore, lack of capitalism.

[nitrogen]

How can capitalism result in anything other than crony monopolies?

[jazzyk]

The government _not_ hand-picking winners and losers (bailouts, lobbyists, etc.) would be a good start.

[Hermel]

In the end, it boils down to whether firms in a given industry have increasing or decreasing returns to scale. For example, there are no hairdresser empires as this tends to be a profession that can already be operated efficiently at a small scale. Other sectors, especially those with high fixed costs, tend to produce monopolies.

[jbooth]

Yes, but it's also a huge indictment of "free market proponents" who tend to oppose any regulation, as it implies the need for muscular regulation of the market.

In American political terms, calling it an indictment of 'capitalism' is a little imprecise but not really wrong.

[oldmanjay]

It's a bit hyperbolic to call it a huge indictment. Or in fact, an indictment at all. It's more like a mildly divergent opinion.

[jbooth]

I'd agree and call it a mildly divergent opinion. The banks being regulated or the Republican primary candidates would call it outright communism. Depends on the yardstick, I guess.

[oldmanjay]

The truth is always somewhere between the marketing and the haters

[AnimalMuppet]

It could be viewed as No True Scotsman, but in this case I don't think it is.

Goldman talks about "reversion to the mean", which is a generally-accepted thing in the financial world. If you've got above-average returns, people tend to take note, and try to get some of those returns, and so there's more competition for those returns, and that goes on until there aren't excessive returns any longer. This is a generally-accepted thing because it's been observed a bunch of times. It's the normal functioning of a market.

So if Goldman is questioning whether this is going to happen this time, it's a recognition that the markets aren't functioning the way they normally do - which I think is financedfuture's point. (He/she is going a step further, and [EDIT]implying that either the financial firms or the government broke the system that had been working, which, if the system historically worked and now doesn't, seems like a reasonable guess.)

[mtgx]

Because the government keeps either bailing it out or protecting some actors when it should be punishing them to a much bigger degree.

Some may say, wait a minute, but if the government does that, doesn't it mean it interferes with the "free market" and whatnot? I think to have a real free market, you need a fair market. If some companies violate the law to get ahead, they should be punished. Or at the very least be allowed to fail when they reach their own individual "bust" after some high growth from risking with people's deposits.

The point is they can't have their cake and eat it, too.

[jazzyk]

The government should not be intervening in the market (through bailouts or subsidies) on behalf of an anointed market player (or group of players).

It should set the same rules for everybody and enforce them. If someone is not playing by the rules, they should be punished.

While an ideal fair/"free" market can probably never be reached, the US has seen better than the abomination we have now.