Wednesday, December 28, 2011

Capitalism: Working As Intended

Chris Hayes mentioned this Steve Waldman post at Interfluidity on banking, capitalism, and the game theory behind why proper investment, the lifeblood of any capitalist system, requires good ol' fashioned lying to really work well:

Like so many good con-men, bankers make themselves believed by persuading each and every investor individually that, although someone might lose if stuff happens, it will be someone else. You’re in on the con. If something goes wrong, each and every investor is assured, there will be a bagholder, but it won’t be you. Bankers assure us of this in a bunch of different ways. First and foremost, they offer an ironclad, moneyback guarantee. You can have your money back any time you want, on demand. At the first hint of a problem, you’ll be able to get out. They tell that to everyone, without blushing at all. Second, they point to all the other people standing in front of you to take the hit if anything goes wrong. It will be the bank shareholders, or it will be the government, or bondholders, the “bank holding company”, the “stabilization fund”, whatever. There are so many deep pockets guaranteeing our bank! There will always be someone out there to take the loss. We’re not sure exactly who, but it will not be you! They tell this to everyone as well. Without blushing.

And instinctively, we understand that capitalism is a zero-sum game:  as Guy sang it in the theme from New Jack City, "Somebody's gotta win, somebody's gotta lose."   We get that.  We don't want to actually believe that, as Doug J and Charles Pierce remind us.  But we instinctively get that.

Waldman goes on to explain that the occasional Gilded Age/Depression is a feature of the system, not a bug.

This is the business of banking. Opacity is not something that can be reformed away, because it is essential to banks’ economic function of mobilizing the risk-bearing capacity of people who, if fully informed, wouldn’t bear the risk. Societies that lack opaque, faintly fraudulent, financial systems fail to develop and prosper. Insufficient economic risks are taken to sustain growth and development. You can have opacity and an industrial economy, or you can have transparency and herd goats.

A lamentable side effect of opacity, of course, is that it enables a great deal of theft by those placed at the center of the shell game. But surely that is a small price to pay for civilization itself. No?

In other words, the dynamic connection between "It takes money to make money" and "A fool and his money are soon parted" is the real engine of American growth.  When the winners are winning this much, you have to have a proportionally massive number of losers losing badly, that's what zero-sum game means.

The cynic in me agrees with Waldman.  The optimist in me remembers that eventually all systems break down completely and are replaced with other systems, and yes, that qualifies as "hopeful" in this situation.

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