banking, capitalism, centralization, decentralization, decentralized governance, efficiency, entrepreneurs, free markets, laissez-faire, legal system, markets, productivity, property rights, regulation, small government, socialism, transportation
This is some of my thinking on economics. I don’t claim to be right or wrong; rather, this is merely how I perceive things on economic matters at the current time and I hope to refine my views over time.
(1) The debate on whether capitalism or socialism is more desirable is a nonsensical one, because “socialism” is an imagined state where humans get along perfectly and cooperate at all times, and is thus, not achievable.
(2) The very terms “capitalism” and “socialism” disguise the underlying economic realities being proposed by those who throw the two terms around.
(3) “Laissez-faire”, like socialism, is not realistically achievable. Moreover, the term is somewhat non-cognizant because it requires one to make distinctions between “public actors” and “private actors” when both can artificially distort the markets and create undesirable results.
(4) The “free market” is likewise not an achievable goal, but rather, should be thought of as an unknown reality. There is a supply and demand for any good or service, but given the real constraints of the world, markets are never truly “free”. For instance, state boundaries might prevent me from shipping my goods to another party in another state, without being at a competitive disadvantage. Likewise, an even better example is in transportation; the market might have truly desired a road through Path A rather than Path B, but legalities might have deterred that result. Indeed, private property rights themselves are state-protected and represent an “intervention” in the economy. Hence, the markets always have restrictions that might hinder them from achieving an optimal result.
(5) So if markets always have restrictions, but there is an unknown reality that quietly pulls at the market (representing what would happen in a hypothetical “free market”), then the best we can do as humans is to try to ‘discover’ the free market result and create structures that allow us to come as close to obtaining these results as possible.
(6) The policies needed to achieve these free market results, however, would be different across circumstances. To come close to a “free market result” in building a transportation system has many more hurdles than creating one in manufacturing widgets. However, this does not mean that we should ignore the benefits of building systems that best meet the needs of the “market spirits.”
(7) While I’ve suggested that “laissez-faire” is unachievable, policies that generally go along with laissez-faire ideology work more often than not. The biggest failures of laissez-faire policies tends to be when its adherents mis-identify a certain action as being ‘interventionist’, when in reality, it might simply be countering another ‘interventionist’ system that was created. An example is banking deregulation in the late ’90s. The idea is that deregulation was “laissez-faire” an eliminated constraints in the system. However, the advocates of deregulation failed to note that the FDIC’s insurance of deposits was a state intervention that made “deregulation” disastrous. This is not a criticism of the FDIC; rather, the FDIC was actually a reaction to how the actions of banks could create market interventions with devastating consequences.
(8) In regards to the above, I haven’t actually come up with a great way to regulate a banking system without creating problems. I think all systems will have their flaws. In general, I think our system works fairly well compared to others, but that we created moral hazard by subsidizing home loans, not requiring banks to hold adequate reserves, and ignoring market forces when pricing FDIC insurance fees. Large banks that can devastate an entire economy if they fail, should pay disproportionately high FDIC fees based on the risks they impose to the system.
(9) Economics needs an equivalent of Occam’s Razor. It’s generally best to have simple structures. However, it’s not always possible (as with banking and transportation).
(10) As I’ve suggested, promoting “capitalism” or “laissez-faire” seems somewhat non-cognitive to me. People who argue in favor of these things often have good underlying reasons for doing so, but just as often fall back on these labels that are often meaningless or even antagonistic to some people. What is generally true (and more understandable to the layperson) is that interventionist actions by large governments often fail, because top-down decisionmaking often ignores the realities on the ground level. In other words, the people closest to a situation on the ground-level understand it best. Decentralized economic structures are more efficient precisely because of this dynamic. Which is why “small government” generally works best and why lower taxes generally increase wealth (as small entrepreneurs operating on the ground level are more productive than top-down bureaucrats who have less incentive to truly understand the economic realities.) Keep in mind that high taxes represent a decision to allocate more economic production to the public sector, which is generally less efficient.