Punchinello’s Chronicles

November 13, 2008

Free Market Capitalism and Consensus Reality

If a million people say something stupid, it’s still stupid!” – Ayn Rand

There’s a key flaw in the general philosophy of free markets — a basic component in capitalism. That flaw is a belief that when many people act in an unregulated way, the overall results are true, beneficial, good, and rational.

The theory is that each of us will act in our own best interests. Taken together as a whole, we all form “the market,” and therfore “the market” always (eventually) acts in everyone’s best interests.

In many ways, the resulting market is like Wikipedia. There too, the theory is that when anyone can change an article, the end result will be truth.

The question is whether a complex system naturally moves toward truth. We’ll define truth as statements or actions that are consistent with an objective reality.

Wikipedia rests on a premise of overall goodwill, in that people generally write and modify articles in an effort to speak the truth. In theory, if someone or a subset of people have it in mind to cause damage, that misinformation can be contained and modified by the larger set of well-intentioned people.

So too, there is a belief that people in general are well-intentioned, reasonable, virtuous, and educated. Taking those aspects into consideration, people will act in a “right” way. At issue is whether those presumed aspects and characteristics are true.

Think about a movie theater in which a fire breaks out. There are a finite number of exits. As the smoke builds and people learn there’s a fire, each individual person acts rationally; they move toward the exits. Depending on how dangerous is the fire, each individual will move more or less quickly toward an exit.

On the individual basis, each person is doing what they ought to do. But taken together, all those individuals join together to form a crowd. At that point, in the crowd, the overall consensus opinion begins to manage the movement toward the exists. If everyone in the crowd understands the problems of chaos and panic, the overall crowd will stay calm and avoid logjams and trampling.

But what if the majority of people in the crowd don’t ordinarily live by reason and education? What if they don’t have any training or practice in exiting a burning building? How many people does it take, on an individual basis to elevate panic to a higher level than calm behavior?

One of the most important debates in presidential elections, and one with the most far-reaching consequences is the argument over government regulation in free-market economics. Over and over again, we’ve seen the results of limited regulation and the resulting public safety issues and scandals. Likewise, we’ve seen repeated examples of too much regulation, and the resulting collapse of entire markets.

The problem is this idea that a consensus opinion is better and has more wisdom than a centralized opinion by a few managing directors.

Interestingly enough, most business organizations routinely use regulated and hierarchical decision-making to control the business. Employees may have some input, but the decisions are made by executive management. Those businesses were built under capitalism, carrying along an assumption of unregulated free markets.

Isn’t that a contradiction? If management is regulating the actions of the overall business, then how is it that we assume a totally unregulated set of decisions and actions in the open market make sense?

One of the solutions that’s not yet been tried (and resolved) is to examine the fundamental concept of government, and to determine if a government is a service or authority. Does a government dictate and control the society, or is a government a representative service. When it began, the United States was designed with representative service in mind. Today, that’s no longer true.

Many people say that a government is fundamentally incorporated for three reasons: to manage the defense against aggression (an organized military), to ensure and uphold contracts (the legal system), and to structure a uniform monetary system (treasury).

What seems to be missing is the idea of public safety.

Free-market advocates argue that if a business or group attacks the public, perhaps by selling tainted milk or including lead in their product, the public (and market) will soon stop buying that product. Although some people will die, “natural forces” will quickly terminate the offending business or group.

Okay, that’s all well and good, but what if nobody knows there’s a problem?

The FDA (Food and Drug Administration) was originally put in place to act as an ongoing testing and monitoring agency: a service. In the best interests of the overall society (the public), each citizen pays a small amount in taxes in order for the FDA to maintain labs and continually test products. When or if the FDA uncovers a problem, it then announces that problem, people stop buying, and the manufacturer shuts down.

Unfortunately, we now spend so much money on non-essential services, administrative salaries, entitlement programs and everything else, we don’t seem to have the money or people to properly run these oversight organizations. Are they “regulatory” bodies or “oversight?”

True free markets, totally unregulated in any way, will eventually work in a beneficial way. Generations of people may die, become ill, or go broke, but eventually, over some long number of years, natural selection will indeed work. But why take so much time?

Anyone who subscribes to capitalism must also have some sort of structural concept of the role of governments, how that role applies to market regulations, and what motivates large groups of people (crowds). The best solution isn’t massive regulation, nor is it zero regulation. To articulate the best solution is going to require a society-wide debate and discussion over the basic role of government.

One step we can look at is the role of education and how our current school system is involved in this debate. With no education in economics, a socialist agenda on the part of so many academics, and almost no education about the nature of politics, are we prepared for such a debate? Based on the 2008 national elections, no; we’re not.

Despite all the rhetoric and demagoguery, the collapsing economic and social structure in the country isn’t going to have a “quick fix.” We’ve passed the point of a one-step solution. None of the past methods of government intervention will work. All of us now are responsible for the overall solution.

Each of us, acting individually, make up the overall market, the overall consensus. Just like in the burning movie theater, the move toward safety will be dominated either by rational and educated thought, or by disorganized, uneducated, and unpracticed feelings. The election results have shown that feelings are more important than reason, at least for the majority of voters.

And so, we’re about to experience a society that’s run by transient feelings, whimsy, panic, and ignorance. We’ll put in place government organizations, business organizations, and social organizations to reflect those feelings-based decision-making processes. All of human history tells us that such a society will fail.

But a whole lot of people “feel” it will work, that we’ll “muddle through, somehow.” I feel they’re wrong.

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8 Comments »

  1. Interesting that you quote Rand at the beginning….

    As for rationality – wouldn’t a free market award rational decisions and punish irrational such? Isn’t that the point of a free market? “Generations of people may die, become ill, or go broke, but eventually, over some long number of years, natural selection will indeed work. But why take so much time?”

    I do not believe this is true, this requires a belief that people are fundamentally irrational (that is – thickheaded idiots), but even if it were true – how are you going to reach the supposed goal in any other way than deregulation?
    Maybe you are not as much proposing a solution as declaring the non-functionality of the current american choice (which is true), but in the same breath you decide to sort-of bash the alternative.

    Your texts intrigue me, because I cannot decipher your position on things. I guess I am hoping it is not something as predictable as the “medium-sized-everything”-position. Medium-sized regulations, medium-size safety, medium-sized wealth. Medium-sized opinions?

    Comment by hpx83 — November 14, 2008 @ 8:30 am | Reply

  2. My position is conservative, founded on a blended philosophy. Unfortunately, that blended philosophy doesn’t formally exist, so I’m having to write it out. Since I don’t want to use a blog entirely that way, I’ve decided to use this blog more for my rants and raves, and to see if I can figure out why I’m ranting and raving. Entirely selfish reasoning, you see. 🙂

    To answer your comment, though; I’m not saying people generally are rational or not. I’m saying that to rely on a consensus is foolish. We can certainly make reliability decisions on the basis of individual relationships or small groups, but not for very large groups.

    Many consenus actions end up being not only irrational but self-destructive. For example, the amount of paving and building in various California areas increases the speed of water run-off, increasing the problem of mudslides. Who made those decisions? Not any particular individual, but a consensus opinion and set of actions.

    In any large society, larger than an island populated by a few plane-crash survivors, we have “too much information.” The money system arises because we want to delegate: Some people will do farming, others will choose manufacturing, and we need a common way to share the work and rewards. As such, farmers concentrate on land, manufacturers concentrate on machines.

    We can’t expect farmers to take time to “keep an eye” on the manufacturing to make sure it’s safe. Nor can we expect the manufacturers to keep an eye on the food to make sure that’s safe. So a governing body acts as the oversight organization.

    Common free-market capitalism proposes that the government doesn’t need to do this kind of monitoring. “Eventually” a problem in food or machines will emerge, people will be killed, news will get around, and the open market will decide not to use that product anymore. It’s like having to wait for enough people to get killed at a traffic intersection before putting up a signal light.

    Totally free markets will eventually work, but at what cost? The Soviet Union eventually collapsed, but it took 80 years and untold millions of lives, not to mention generations of very low-quality lives for many other millions. But a return to the 1800s of child labor, slave wages, horrible living conditions and widely disparate life-quality conditions doesn’t work either.

    Any capitalist implementation, therefore, is going to have to have some kind of organizational “plan,” if you will. That plan must provide for government regulation but also limit the regulation. I see it as similar to the Constitution’s Bill of Rights, designed to limit government not give that government rights. So too, we need a capitalist “business plan,” so to speak.

    The problem is that formal economics continues to assign thought and emotion to entire groups of demographics, crowds, or populations. It’s a statistical tool, useful in limited situations. But we can’t say that “the county” or “the city” thinks or feels a particular way. Technically, there’s no such thing as a living county or city, nation or state. If we believe that this gestalt “self” actually exists, we’ll end up in trouble over and over again.

    The solution is an organized redevelopment of what we might call “common sense.” But for that commonality to apply we have to have common values, common ideals, common education, common cultural foundations, and common belief systems. And there, a fascinating problem of sociology and anthropology begins to emerge. I’m interested in examining that problem.

    Comment by Punchinello — November 14, 2008 @ 1:04 pm | Reply

  3. I will agree that consensus is bad. The whole concept of a “consensus” implicates nothing but a random group of people coming up a random conclusion. I believe in logic, because it is, in fact, logical.

    “We can’t expect farmers to take time to “keep an eye” on the manufacturing to make sure it’s safe. Nor can we expect the manufacturers to keep an eye on the food to make sure that’s safe. So a governing body acts as the oversight organization.”

    Oversight is what governments should be about – but I think that there should be a limit to overseeing that laws are followed. While I do recognize the need for overseeing other things, I do not see how this must necessarily be done by the government. If people are interested “safe manufacturing”, why wouldn’t they be willing to pay for it? If people are interested in “safe food”, wouldn’t they be interested in paying for it?

    “Safe” solutions is also a way to compete. If you get to choose from “unknown meat from unknown producer really cheap”, or “quality-guarantueed meat from producer xxxx – rated as AAA safe by the xxxx organization”, which would you choose? This is of course dependant on your trust in the xxxx organization, but if this is a consumer organization that depends on its integrity (otherwise, it will be replaced by another organization) then it is just as likely to be trustworthy than any government oversight organization.

    “Common free-market capitalism proposes that the government doesn’t need to do this kind of monitoring. “Eventually” a problem in food or machines will emerge, people will be killed, news will get around, and the open market will decide not to use that product anymore. It’s like having to wait for enough people to get killed at a traffic intersection before putting up a signal light.”

    The idea of the traffic light was probably the effect of a lot of traffic accidents. But we didn’t need one separate traffic accident for each traffic light, and in the same way – once the problem is discovered, there will be a market for providing oversight services for that particular problem. If there is self-interest (“I want safe food!”) then there is a market.

    “Totally free markets will eventually work, but at what cost? The Soviet Union eventually collapsed, but it took 80 years and untold millions of lives, not to mention generations of very low-quality lives for many other millions. But a return to the 1800s of child labor, slave wages, horrible living conditions and widely disparate life-quality conditions doesn’t work either.”

    But what is the comparison here? Why would capitalism – the greatest force behind human development and wealth, need 80 years and millions of lives to accomplish totally free markets, just because communism – the greatest force between human oppression, destruction and evil needed 80 years to collapse? And why would we return to the 1800s? The reason for how society looked in the 1800s was not mainly due to any political direction – it was due to the general lack of wealth in the world. Enter capitalism – and 200 years later life is a lot better.

    “Any capitalist implementation, therefore, is going to have to have some kind of organizational “plan,” if you will. That plan must provide for government regulation but also limit the regulation. I see it as similar to the Constitution’s Bill of Rights, designed to limit government not give that government rights. So too, we need a capitalist “business plan,” so to speak.”

    I think there is an easy capitalist plan for taking us from where we are now. De-regulate, and start with the most unlogical and unfair regulations. Lower taxes – not all at once, but step-by-step. If we keep this up, we will see a gradual increase in production, living conditions, and most importantly – entrepreneurship. People will realize that the future is theirs – and that they do not need the wet blanket that is government over their heads for safety

    “The problem is that formal economics continues to assign thought and emotion to entire groups of demographics, crowds, or populations. It’s a statistical tool, useful in limited situations. But we can’t say that “the county” or “the city” thinks or feels a particular way. Technically, there’s no such thing as a living county or city, nation or state. If we believe that this gestalt “self” actually exists, we’ll end up in trouble over and over again.”

    Exactly. So how could a government ever know what “people” wanted? People know what people wants. So I think its only fair that people are allowed to decide for themselves.

    “The solution is an organized redevelopment of what we might call “common sense.” But for that commonality to apply we have to have common values, common ideals, common education, common cultural foundations, and common belief systems. And there, a fascinating problem of sociology and anthropology begins to emerge. I’m interested in examining that problem.”

    Common sense is a good thing when it comes to individuals. But give it to groups – and they return with “consensus”

    Comment by hpx83 — November 15, 2008 @ 4:10 pm | Reply

  4. The reason for including the Soviet Union is shorthand. Communism is the most opposite of capitalism, so we’ve had a chance to see how it works and how it associates with human nature. It took 80 years for capitalism to overcome communism. That’s fine, but it still was 80 years. That’s nearly five generations, an entire seculum!

    We could allow 80 years for government regulation to wipe out even a semblance of free markets, but do we (as a society) want to do that? Do we need the same sort of real-world demonstration that took place in the USSR? I’m afraid that’s what we’ll need, mostly because so few people really care until it affects them directly.

    Actually, this article comes about because I’m realizing that the problem isn’t so much “the people,” nor is it “the government.” It’s the underlying premises used by economists. Those economic advisors have a lot of clout with politicians, because the politicians don’t really understand economics.

    Perhaps by attacking the philosophic premises taught in high-end business schools, collapsing the platform of “consensus,” we might change things. I keep coming back to the educational system, whether in gradeschool or universities. These premises work their way throughout the entire system, eventually being codified into laws and regulations. If we can highlight “consensus” politics as a root cause, maybe we can start to remove it. Like a virus.

    Comment by Punchinello — November 15, 2008 @ 5:05 pm | Reply

  5. I wouldn’t say it took capitalism 80 years to beat communism, it only took 80 years before the corrupted minds of the leaders in the USSR finally gave up and realized that they couldnt compete with capitalism. True, most people do not care until it affects them. But it is affecting them now – and it will affect them all the more when we start seeing the end result of the current government-intervention-frenzy. If enough people realized why this is happening – the regulatory state would be thrown out on its arse and anyone saying “regulation” would be kicked out of office faster than he could write an official apology.

    And you are getting dangerously close to the truth. The problem is not the people. It is the government, inasmuch as it shouldnt meddle with things it doesn’t understand. And politicians do not understand economy, and economists have since the beginning of this century gone on a crooked path towards incompetence. If you want to see the problem at its core, read a couple of classical austrian economy books, and see how all of this has been predicted, understood and warned about for a very long time.

    There is a cure to all this.

    Comment by hpx83 — November 16, 2008 @ 5:31 am | Reply

  6. “The theory is that each of us will act in our own best interests. Taken together as a whole, we all form “the market,” and therfore “the market” always (eventually) acts in everyone’s best interests.”

    Very close to Greenspan’s quote, and part of his fallibility. (Read my blog, Greenspan’s Folly). Pity our world has passed all that naivete.

    I am also, among many things, an historian of my family. As a genealogist, documentation and validation of those histories is paramount. Time and again, however, I see the boatloads of people who “submit” forms which “prove” the parentage. The connections are invalid because there is no documentation, no quoted sources, no cross-referencing of data. And so, all that information in which there may be, or may have been, a grain of truth somewhere, I throw out because it is too obscure to have any value. Not just to me, but to all the people who share my birth surname.

    Point being, we can — any of us — say whatever we want. We can put on a face, decry the majority. All in all it makes no difference if we don’t have proof. The problem lies in that there are so many good salespeople in the world.

    They sell their stories, their souls, their bank accounts, their physical abilities, their power and when it all boils down to the end-game, God knows the truth and He’ll be the one passing judgment on them. But, here on earth we don’t have that omniscient ability, and we do the best we can with what we have. We try to believe in people, like Greenspan tried to believe the banks…

    The everyday person is too overwhelmed, especially right now, just with surviving the current climate to be terribly interested in economics. They just want it to get fixed, and their own participation isn’t even a consideration in the event. The fact that so many participated in our current election is the testament to that — people want Obama to fix things, to change it and make it all right again!

    I don’t think we can afford to do that right now, but like so many others, I don’t know how to fix it. I’m just another uneducated Jo(sephine) and my time is seriously divided by life. I have 3 small businesses and hope they will one day help me do more than survive. Gosh, I barely have time to blog! 🙂

    Comment by cjspicer1 — November 16, 2008 @ 10:43 am | Reply

  7. There’s no such thing as “dangerously close to the truth.” Either there’s truth or there isn’t truth. But either way, there comes a point where human intervention no longer can hide actual reality.

    Comment by Punchinello — November 16, 2008 @ 1:04 pm | Reply

  8. “The everyday person is too overwhelmed, especially right now, just with surviving the current climate to be terribly interested in economics. They just want it to get fixed, and their own participation isn’t even a consideration in the event. The fact that so many participated in our current election is the testament to that — people want Obama to fix
    things, to change it and make it all right again!”

    Yes, the problem in all societies is that most people don’t want to know how that society is organized, managed, and financed. It’s the same with most corporate businesses. They just want someone else to fix things, someone else to manage things, and someone else to deal with the problems.

    All everyone wants is a nice quiet life, a chance to build a family, get some nice things, and enjoy their days. And in a healthy society, that’s what ordinarily would happen. But note that in most fairy tales, the story begins with a “bad king” or queen, and the people aren’t happy. Few fairy tales tell the story of how the land became depressed and how that “bad king” came into power.

    Freedom carries with it the responsibility to sustain that freedom. It isn’t up to a central authority to “create” and maintain freedom. It’s up to each and every individual within a society. “Not having time,” “being too busy,” “not knowing,” and all the other excuses we use are just those: excuses.

    The sad thing is that when everything comes to a grinding halt, the one thing everyone will have is plenty of time; time to figure out how we got here, what to do to fix things, and how to rebuild things and get them going again. When the government fails, then each individual person will have lots of time to contemplate, learn, and act. At that point, survival will become the priority, not the enjoyment of doing what we choose to do.

    Comment by Punchinello — November 16, 2008 @ 1:15 pm | Reply


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