This financial and political system is the operating system on which the world runs; the Dutch introduced version 1.0 in about 1620; the British introduced 2.0 in about 1700; the Americans upgraded to version 3.0 in 1945, and as an operating system, it works pretty well—most of the time. The 300 years of liberal, global capitalism have seen an extraordinary explosion in knowledge and human affluence. Not everybody shares in these benefits, and there are environmental and social costs to the rapid progress. Still, not many of us would like to turn the clock back to 1610.
But the system has bugs—among them, a tendency to crash. Ever since the great Dutch tulip bubble of 1637, the economic system has been prey to roller-coaster-style booms and busts. From the South Sea bubble of 1720 to the subprime loan bubble of our own time, the financial system leads people into irrational behavior and fever dreams of wealth and of eternally rising prices for stocks, houses—and tulips. These episodes never end well, and as time passes and the financial system grows more complex, more global and more interdependent, the cost of these periodic crashes gets worse.
RTWT.
Most of those who criticize the free-market for crashing work from the often unstated assumption that a politically managed economy would not crash. These assured assumptions are only stated after a crash has occurred.
In fact, a lot of people seem to operate on the assumption that there if people weren’t stupid that we could avoid all problems in everything.
…the financial system leads people into irrational behavior…
I think this statement has it backwards. It’s human nature that causes irrational behavior in financial and other systems. To continue on Shannon’s theme, one of the main advantages of open, decentralized systems such as free markets is that they minimize the existence of single points of failure. The inevitable booms and busts are buffered by alternative loci of decisionmaking and capital, rather than amplified by inevitable policy mistakes in centralized systems, and don’t take everyone down.
The rest of the Mead quote is characteristically insightful.
There’s an old story about the engineer and the mathematician who were captured by enemies and thrown down into a deep hole with vertical, slippery sides. The engineer was in despair: “We’ll never be able to get out of here.”
The mathematician, on the other hand, was cheerful. “No problem at all. I know just how we can escape.”
Engineer: ?????
Mathematician: “Assume a ladder.”
Much economic & political thinking is about on a par with the mathematician in the story.
David Foster,
Another one from my college days. How can you tell a physics word problem from an engineering word problem?
Easy, physics problems start with, “Ignoring friction…”
Based on the history of politically managed Economies in Europe, Asia, South America and Africa we can say that those systems which are 100% planned have no market crashes. This happens because there are no peaks and valleys. These systems eliminates the peaks. That means their citizens live in the valleys, caught in a perpetal downturn.
People who live in these economies adopt a philosophy that materialism is bad for the soul — that there is more to life than having lots of possessions. Their leaders remind them that they are not being exploited by ruthless capitalists. Their leaders shoot them if they try to leave the country without permission.
Of course, if all the economies in the world were 100% planned and managed, then no one would want to leave the country. Perhaps this is how Obama plans to stop illegal immigration.
What this quotation touches on, but leaves unexplored, is the powerful desire in most people to have things stay familiar and unchallengingly stable. This desire is not a negative aspect of a human’s makeup, but clearly reflects the pre-human dependence on instinct, and the later hope that things will remain the same so that learned survival strategies will continue to work properly.
The most obvious example is isolated cultures who go through all sorts of agonies when confronted with another cultural pattern, and try desperately to maintain their traditional cultural patterns even when it is clear those behaviors no longer match the new environment.
Japan, China, Native Americans, and the current attempts to insulate religiously strict cultures from exposure are well known examples. This is also the trap that many so-called revolutionary regimes fall into, believing they can isolate and control populations by forbidding contact with the “decadent” ideas of outsiders.
Indeed, this pattern is repeated over and over—the desire for a stasis in which everything is familiar and under control. The current climate change whoop-de-do is based almost entirely on this fantasy, i.e., that the climate is optimal and shouldn’t change. The corrollary, that evil technological humanity is the culprit, is an ideological flourish which has its own set of motivations.
But, in fact, as we look back on history from an empirical perspective, humanity has confronted an endless series of crises and turbulent situations, brought about by natural forces as well as human actions, which bely the assertion that there were ever any of these idyllic times that lasted for more than a few generations.
I remember reading many years ago that ancient Egypt, which was postulated by many scholars to be this rock solid theocracy that went on for century after century, was actually a turbulent society, marked by intermittent revolts, assassinations, frequent wars, and numerous plagues and famines that had little to do with biblical curses, and much to do with corruption and incompetence. The myth of Egypt, solid and unchanging as the pyramids, was more romantic and majestic than the tumultuous reality.
Capitalism is revolutionary, as are the political principles that support it, precisely because it recognizes and conforms to the reality of both natural and human volatility, and rewards innovation and originality, instead of condemning them as taboo.
Are there boom times and bustouts? Yes, because the economy is nothing more than people living and working together as best they know how. And it works because many small decisions are better than a few big decisions, since all are made by humans, and some are bound to be wrong.
It isn’t a flaw that capitalism has ups and downs. It is a characteristic of the system’s congruence to reality—one of the main reasons humanity has gone from horsepower to the moon in a century, after millenia of walking behind some oxen to scratch out a subsistence crop based on the traditional ways.
It takes energy to embrace change – but it gives energy. I love Veryretired’s perspective – though some days I’m not sure I’m up to it personally.
A favorite joke of a friend who teaches accounting: Three guys interview for a job. Each is asked what is 2 + 1. The mathematician discusses theory. The engineer discusses applications. The accoutant simply asks: “What do you want it to be?”
VR — read the whole thing.