When Capitalism is great and not-so-great Understanding when capitalism can potentially undermine innovation, competition and merit
When Capitalism is great and not-so-great
- After the fall of the Soviet Union and even China's migration to a market-based economy - even though
- they called themselves communists the economy is now essentially capitalist -
- there's been a kind of general consensus around the world that capitalism is the way to go.
- You know, just to put my bias... I am in that camp. I would consider myself a capitalist.
- But what I wanna do in this video is do a little bit more of a nuanced discussion
- of capitalism versus, say, socialism.
- Because I feel like there has been especially here in the United States and in the West
- there's sometimes a knee-jerk reaction against anything that even has a whiff of the government getting involved, or
- even a whiff of socialism.
- So I want to think more about what are we trying to achieve in the capitalist system,
- and where we could fall into kind of the things we don't want to achieve
- if some of the aspects of capitalism are allowed to go on without any type of controls or maybe some
- type of regulation.
- I don't wanna advocate anything, I just wanna give you maybe a framework for thinking about it.
- So if you ask any capitalist including myself you say
- what is good about capitalism?
- I would say that it aligns everyone's incentives.
- Good incentives.
- If you work harder you can earn more, you can generate the capital for yourself.
- You can use that improving standard of living.
- You can reinvest that capital.
- So it's a good incentive structure.
- I am not saying that everyone is motivated purely by the desire to earn
- I think, you know, there's plenty of people in the world who are motivated for the desire for social good, for elevating mankind
- But the general sense is in a lot of parts is that those types of things are specific to certain domains, but
- in other domains if someone's running a trucking company it's not clear that someone would run
- a trucking company optimally just for the good for mankind
- Maybe they would run some non-profit that way but a trucking company or a farm or something like that, who knows.
- So in general you have a good incentive structure.
- There is also this notion in a capitalist economy: that it's a meritocracy. It is meritocracy.
- And I am gonna actually put a box around this
- because a meritocracy in my mind is super-duper important
- Almost everyone is a fan of a meritocracy
- Even the communists were a fan of a meritocracy.
- They would give exams to people and have the people who were successful have more authority within the communist regime.
- So meritocracy is something that other, everyone lays claims to
- And actually a lot of socialists or communists would claim that
- extreme forms of capitalism when the wealth disparity becomes too extreme
- where you have inherited wealth
- actually goes against the idea of meritocracy
- Let me put meritocracy here as well. We'll talk about that in a second.
- And then the other idea is that you have innovation in capitalism
- And these are all related ideas.
- That if the incentives are good, if capital gets in the hands of people
- who are most deserving of it, because they've somehow earned it
- they somehow innovated
- that it can also lead to innovation
- because right people are handling the capital
- Now if we go to the socialist's side of things
- They'll say: well look, there's a social cohesiveness to this.
- Let me write this down.
- And I won't speak to... You know...
- I don't claim what I'm going to do in these video is comprehensive of all of the pros and cons of either
- I just wanna give a little bit nuance to the discussion.
- So social cohesiveness
- You won't have this situation where you have you know
- a gazillionaire sitting behind the walled compound with armed guards and there are people right on the other side of that walled compound starving to death
- and these people don't even necessarily view themselves as part of the same society, as part of you know
- as somehow the responsibility to each other
- And that is happening in some parts of the world.
- where we have severe disparities of wealth.
- Where the rich people don't even view themselves as the same species as the poor people.
- Or even vice-versa
- The other idea
- and I'll put this thing in quotes, of "fairness"
- I'll put it in quotes because one could say: well, it's fair
- if you make more, if you work harder you should get more, you should innovate more, you should get more.
- And this notion of fairness as well. But looking sometimes at wealth is so extreme, sometimes we have this notion of inherited wealth, generation after generation, old money
- What's fair about that?
- That people just rent people can extract the interest out of the wealth
- and never have to work and other people have to work super hard and and really get nothing for it.
- So you know, the notion of fairness I'll put over here as well.
- Fairness... because there's arguments for either
- And so like I said I am definitely biased to the capitalist side of things
- I think there is an important... Two of these things that we have on the right hand side
- But the reality - at least, you know, what we've seen in the economic experiments of the 20th century
- is that even though communists and socialists might speak to these types of things
- to large degree there is less social cohesivness; the senior communists in the Soviet Union would drive fancy cars
- and they did have a very different lifestyle than the workers,
- and they would hide that lifestyle, and then it would lead to a lot of hypocrisy
- in general the extreme forms of socialism. Not clear that it was a meritocracy.
- It might have been just the best people climbing up the party ladder that get to the top as opposed to the people
- who would innovate actually, produce in a better way.
- But with that's said I wanna give fair warning.
- I want to give fair warning that capitslism, if it kind of goes unchequed in certain ways,
- it can also lead to those same problems as socialism.
- The main problems there when we think about good incentives.
- I think the incentives, and once again, I'm giving my opinion here. The incentives work out well when you have a bunch of competitors
- who can compete and innovate
- And it makes complete sense. Let's say that this person comes up with an innovation
- and because they have the innovation they are able to provide a better good that's cheaper to society
- So they make more profit. It seems reasonable that that person should get more profit, more wealth and grow
- And it could even be good for society because this person is an innovator.
- Maybe there is an element of luck there,
- but it seems like they are competent at managing these resouces so it's good for society to give them more resources to manage.
- The problem where capitalism... the area where it becomes less clear that capitalism is unambiguously good
- is the situation where this person becomes outright dominant.
- So let's say that this person becomes so big that none of these other players can even compete with him.
- So they all disappear; this person can just undercut everybody and all of the other players disappear.
- This is a situation of a monopoly.
- And the problem here - monopoly -
- is that when this guy had competition he had every incentive to work harder,
- had every incentive to innovate.
- It was a meritocracy because the person who innovates well grows fastest
- But once it gets to a monopoly stage and everyone else has died down,
- this is the only player in the economy.
- Then all of a sudden he has not incentive to innovate. This corporation or this person can just keep raising prizes,
- there is no competition. There is no one who can say: hey I can make a better product, or I can sell it to you cheaper.
- So it actualy goes against the ideas of innovation.
- That's why it is really important, that's why it is the part of, especially in the United States , is part of the economic system
- that you try to break up monopolies.
- That you don't like monopolistic practices.
- The other risk that you have when you start having a lot of wealth and a lot of influence of one entity or one person or one cooperation
- And this sometimes can happen in a democratic and even in a non-democratic regime
- Is that the control of resources aren't just control of those resources, aren't just control of land and buildings and railroads
- They can also use it to influence government.
- And in the United States this is kind of institutionlised in the form of lobbying.
- And when you have access to resources and you can influence government in this way
- you can get the government - so let's say this is the government over here -
- You can get government to essentially do things for you,
- so it works to you advantage, and maybe allowing you eventually to become a monopoly
- So you can kind of view this as crony capitalism
- where, you know, lobbying can be a form of legalised bribery.
- And in that way you can kind of own the elected officials.
- I'm not saying that this is happenning everywhere, but it could happen.
- And in that situation you have the government acting at the behalf of these.
- And once again it goes against the idea of a meritocracy.
- Because when you have this cycle of developing, maybe this person right over here has the innovation
- But this person does not have the influence with the government
- and so this guy gets the government contract for the plane.
- so this guy gets the tax benefits from the government
- So he can be even more competitive. He can undercut this guy.
- Even though this guy has the innovation.
- The other element - and I could talk about this for hours,
- and these are just things to think about - are the idea of inherited wealth
- and I am not saying that inherited wealth is a bad thing
- But there's this idea that let's say someone through their competence, maybe competence with a little bit a luck
- is able to accrue a huge amount of wealth
- and maybe they are not even a monopolist
- but they are able to get a huge amount of wealth
- but they were able to do it, that they were really good managers, they are this kind of this, you know, really smart dude.
- He can really manage a lot of resouces well.
- The question arises is what happens when this person passes away.
- In the very purely capitalist situation you pass this on to your children.
- And the issue here is, one, what did this person do to earn it
- And also from a society's point of view, maybe this person here is a dummy
- maybe, you know, maybe there is another kid over here
- who was born exact the same time who is way, you know, way smarter, and who, you know...
- But this kid is now in control of a hundred gazillion dollars. And he can completely mismanage
- these resources so that they're completely wasted.
- And so you have this idea of, over time, inherited wealth in a capitalist society,
- Can go against the ideas of meritocracy.
- It can go against the idea of good incentives.
- Because if this guy inherits enough money, he has no incentive to work.
- Why should he study hard and go and, you know, tackle math and all of that?
- He inherits enough money. He gets millions of dollars just of the interest
- Why should he educate himself? Ge go daddy's or granddad's money and so it also goes against the idea.
- Why should he try to innovate, why should he do anything?
- I'll just... he can just hire some of these people and, you know, give them a minimum salary or whatever it takes.
- And so it kind of goes against these ideas of fairness and all of that.
- And I'm not saying that I am against inheritance.
- I'm just saying it's something we should think and there's probably some threshhold of inheritance
- That starts to undermine some of these ideas of a meritocracy and good incentives and fairness and all of that.
- That's why I think it's funny when people who call themselves old money
- are kind of proud of it, that they view themselves somehow being part of a better caste
- Because old money means that you did not earn the money youself,
- that your granddad or your great granddad earned the money,
- And you've just happened to be born in this family, and, you know,
- are essentially just living of the interest.
- And it's funny cause they talk about new money, new money like it's not just as good as old money
- But at least the new money people - maybe it was through luck but maybe it was through competence or innovation
- This is something that at least in mind I'd respect more.
- For old money you've done nothing. I mean what's the difference between old money or
- king or queen or aristocracy in Europe that kind of go against a lot of philosophical under fittings that the US is sort of based on
- So I'll leave you there
- I just wanted to add a little bit of nuance to the conversation
- We'll say that I come to this conversation with a capitalist bias
- But I'm hoping that this gives you just a little bit of more nuance
- So instead of saying that capitalism is an unabmiguous good and socialism is an unambiguous bad
- these are the things that we should try to promote and to do that we do have to do soem things
- Like make sure that everyone is educated so that we can can a meritocracy
- If everyone is educated then we have equal opportunity
- and that does involve on some scale some type of re-distribution in the form of education
- Maybe we do need some form or way for people to get health care
- You don't want people dying in the streets
- I'm not going to take a stance here but I just wanted to show that you can't just say that everything has to be purely capitalist
- and you cannot have any notion of government intervention
- You want the governement to invest in things like long term research where maybe you don't have an immidiate
- profit motive but 15, 20, 100 years down in the future it might help a society to thrive
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