Open Capitalism

The notion that capitalism can only function by means of OpenTransactions conducted in OpenMarkets.

Where's the (necessary) presence of capital in the above?

Capitalism isn't about money, it's about freedom. -- MikeSmith // Only the freedom of those who have the money.

Dictionary.com disagrees 'capitalism n : an economic system based on private ownership of capital [syn: capitalist economy] [ant: socialism] '

Source: WordNet

Under efficiently functioning capitalism, all people are free to engage or not from any transaction they choose. Money is simply a medium of exchange often used in transactions. Physical labor is also commonly exchanged for goods/services. Capitalism hampered by health/safety, licensing, and minimum wage laws prevents the poorest people in a society from freely engaging in otherwise perfectly acceptable transactions thus helping to ensure that they are kept poor. -- MarkAddleman

In the case of the MinimumWage, it's basically a simple math problem. If the MinimumWage is set at $X, then if your labor is not worth at least $X to an employer, the government does not allow you to work. Doesn't seem like a great system for low-skilled (i.e. poor) people. On the job training is one of the best ways to improve one's skills; if you have no job in the first place, this avenue of self-improvement is closed to you.

In fact, studies show that, in the UnitedStatesOfAmerica, teen-age minority kids are the ones mostly hurt by the MinimumWage laws as fewer and fewer of them are engaged in entry-level jobs. (source: http://www.cato.org//pubs/regulation/reg18n1c.html) -- MarkAddleman

There seem to be a lot of AmericanCulturalAssumptions here. These things work different in different parts of the world. Not the laws of economics, but what people associate with the term 'capitalism', the ways and means societies have developed to help the poor, and details like whether teen-agers have to earn money or have to go to school. -- AnonymousDonor

What is your definition of capitalism or what do you associate with it? It seems we should also define freedom -- MarkAddleman

Why don't you help us with what is understood in America by capitalism. In my country (Romania) we want to reach to the capitalism, but we haven't figured out what that means. On the other hand when I arrived in America I said to my self Wow, am I back again in socialism ? (that was my personal impression, I'm not saying that it is true). I must admit that american socialism is a lot better than let's say socialism in France, but both countries pretend that they are capitalist. I'd be grateful if you'd create a wiki page for capitalism. -- CostinCozianu (I am not the AnonymousDonor)

Last elections in Romania showed that the majority of the people don't want capitalism - at least not too fast and not too extreme. Too many became poor since the revolution and too few became rich.

Last elections in Romania didn't show that, because purely and simply the vast majority of people in Romania don't know what capitalism is (me included). Apparently not even Americans know what capitalism is, and I'd be grateful is somebody shows me a country where people know such things. Not to mention the nice theory (belonging also to NoamChomsky) that the last elections in America represented a random vote and not an informed choice. See http://www.zmag.org/ZMag/articles/jan01chomsky.htm. -- CostinCozianu

Ok, they didn't want what they associate with capitalism.

Or they didn't want anything at all, which might also have happened with a majority of Americans. The danger of democratic systems is that they tend to slide from free choice to no real choice at all. Modern societies are not very aware of this danger, or their political and business elite is very comfortable with the situation and they favor it.

This is the problem of democracy. Majority does not always choose freedom.

America is not pure capitalism. Whether or not this is a GoodThing or a BadThing is open to debate. My personal belief is that America would benefit by moving toward pure capitalism and casting off its more socialist tendencies.

The essence of capitalism is people freely choosing to engage or not in transactions. One essential requirement here is the freedom of the individual to engage in or abstain from any given transaction. From this basis, some people will argue that you can derive notions of property rights and capital. While I agree that it's possible, I don't believe the resulting society would be a particularly pleasurable one to live in (see the current implementation property rights in Russia for an example). Therefore, I contend that the other essential requirement is a government imbued the sole right to use violence to enforce property rights. With the assumption that individuals own themselves, all laws against murder, rape and other violence against one's person can be derived.

Under capitalism, the transactions in which a party of individuals chooses to engage presumably will benefit all those involved, thus increase the net happiness of everyone in the group. There is no assumption of a fixed amount of happiness available. In fact, so long as the government protects an individual's right to engage or abstain from any transaction, no other individual will ever cause another to lose some amount of happiness. Any requirement to either engage in or abstain from voluntary transactions will reduce the net happiness of the society.

All of this is a long winded definition of capitalism and freedom. Feel free to edit and reduce it down to its core.

-- MarkAddleman

So, let's see if I understand correctly (I acknowledge my almost ignorance in economics, and besides, some people complained that I always wanted to be right, I do it for the sake of discussion ).

taxes, are they voluntary? I'm not saying all taxes should be abolished, but they don't fit in your model. However most taxes can be justified as payments for services rendered by the government. Except for the property tax.
corporate bureaucracy ? they engage the real owners (the shareholders) in transactions that they might not consent to. This can't be solved by government.
In general a voluntary transaction should be read as voluntary in the sense of informed choice. Or in the absence of information a choice is not a choice, it is rolling the dices. Therefore corporate bureaucracy, capital markets, are not capitalist. They often tend to be a legalized scam as they prevent the real owners of capital from making informed choices, wilfully provide bad information and wilfully hide information from the real owners.

You can add to the list.

The last two are easily handled by the model, so let me deal with them first. Shareholders are aware that the corporate managers' incentives may not be directly aligned with their own. To some degree, this misalignment of incentives can be corrected by providing shares (normally in the form of options) to management instead of cash as their salary. This way, both shareholder and manager have an incentive to increase the value of the shares. However, this does not correct all of the misalignment fundamentally because money is not a perfect proxy for happiness. Any additional risk of misaligned incentives are therefore priced into the share. That is, a shareholder can always sell his shares should management make decisions contrary to the shareholder's happiness. To the degree that shareholders believe this to be a real risk, the monetary value of the shares is decreased.

The idea of informed-choice is not strictly necessary for a free market. What is necessary is that all actors make some assessment of the risk associated with making decisions under uncertainty. Because capitalism requires voluntary transactions, we can safely assume that some actors won't participate in a transaction if the risk of hidden information is too high: the value of that transaction will be duly discounted. If the actor offering the good has a reputation for withholding vital information, he will be penalized in the form of a lower price for his good. Therefore, he will be incented toward providing information.

The classic example of this is the bond market in the UnitedStatesOfAmerica. Originally, bonds had no quality rating associated with them and, therefore, buyers in the market would tend to discount the value of those bonds by company name rather their business fundamentals. Through nobody's fault, high quality offerings by new companies would end up being discounted too highly simply because the buyers did not have enough information. Ultimately, these companies banded together and formed an independent non-governmental agency to rate debt offerings. This new agency was financially beholden to companies making the offering, but was strongly incented to be completely honest because their future income was tied to buyers believing the ratings. Note that no company is required to have their debt rated, but they incur a huge penalty through a higher interest rate charged by the buyers if they don't. There are many other examples of this kind of 'voluntary regulatory agency' such as ConsumerReports?, UnderwritersLaboratories?, NFPA, etc. Insurance companies also play a role like this.

-- MarkAddleman

The first two points are in theory. There are many conditions that need to be met for these mechanisms to function, and we don't know if they can possibly function ideally. There needs to be a way too complicated mechanism to make sure that many accidents will not ruin the principles. What I see in reality is that shareholders have no power whatsoever, they are furnished with bad information when they buy the shares, and also when they sell them. Not only directly by the management, but also by the media , the so called analysts, so on, so forth. -- CostinCozianu

Capitalism has an optimistic view of people particularly in regards to their intelligence. This is one of capitalism's points that I really like: it assumes that people are intelligent, mature individuals capable of making decisions for themselves better than other people making decisions for them. Note that I don't say they make perfect decisions. This is impossible because omniscience is not possible (although various government officials act as if it is). Unlike government regulations, capitalism makes no attempt to prevent problems from occurring. In practice, no amount of government regulation can do that, either.

To address your specific point: Yes, people will get mislead by so-called analysts, media, etc. You can never completely stop this. However, it's not a problem either. People will learn to properly discount analysts opinions and the analysts will disappear because they are incapable of providing good advice. Or, better analysts will become available and people will pay them more. Cases to illustrate the point: ConsumerReports?, UnderwritersLaboratories?, StandardsAndPoors?, Moody's, DowJones?, and the AmericanStockExchange?.

Fundamentally, people are not stupid and still learn very quickly how to trade their money for happiness in ways that best suit them.

-- MarkAddleman

Fundamentally people can't be smart unless they have: a) proper education b) information . NoamChomsky alleges that the the American society is not particularly fond of either of the two, and even that the whole social pyramid is based on keeping people ignorant. Than there's the second question that the macromodel looks nice, but in practice a lot of people get hurt and they are not likely to get a second chance, a lot of people are scammed, a lot of people steal money. You can't explain to those shareholders suing Oracle for damages that this is how OpenCapitalism is supposed to work. It is very interesting to see how things will evolve in the future.

I disagree with your first assertion. At least, I think I do. People need only one thing to to become smart: feedback. Capitalism provides that in abundance. On the positive side, the feedback tells investors where to put their money so they can make people happy. On the negative side, the feedback is a loss. Some people want to soften the negative blows. Minimum wage laws, government social programs, and safety laws are all examples of this. Oftentimes, people believe their attempts to soften negative feedback comes without a price. They are wrong. It is just that the costs of absorbing the blows get deflected either among everybody (such as taxes to support a given, narrow industry) or they are hidden in the form of opportunity costs (as in the case of a poor, minority teenager who doesn't get hired because of minimum wage laws).

Command and control economies distort the feedback to such a great extent that no one knows how to make other people happy. If this situation goes on too long, people will forget even how to make themselves happy.

As evidence that American society is, in fact, favorably disposed to education, witness the higher education system in America, particularly the large number of high quality private institutions and research labs. As for information, again, this is not necessary for capitalism, but when it is valued by one party or another, they will find a way to obtain it.

I'm not trying to say that OpenCapitalism is bad, on the contrary, for me it is the lesser of the evils. I think that OpenCapitalism can't exist in practice right now, but we can hope that societies will gradually evolve towards OpenCapitalism (maybe we won't live to see that). Information technology will be crucial in this evolution and I think OpenCapitalism can only exist once we'll have advanced a little bit further with our lousy technologies. -- CostinCozianu

I think we generally agree. I'm certainly not arguing that any modern society is capitalistic (although Hong Kong comes close). I would argue that capitalism is head-and-shoulders better than any other economic form for bringing happiness to everyone.

As for Chomsky's arguments, I've never read ManufacturingOfConsent?, so I really shouldn't argue with his thesis. So take my following statements with an entire pillar of salt: I understand that his argument assumes a lopsided model of the news business, ie - larger and fewer media outlets with no new entrants into the market. This assumption is not only absurd, but demonstrably untrue.

Demonstrably untrue? Really? Recent studies showed that 50% of website hits were on just 14 sites (AOL, MSN etc.). And the number of sites in that list is falling. Despite 'new media' appearing, we are heading back to a situation where a big few dominate (see, for example, http://pm.netratings.com/nnpm/owa/NRpublicreports.toppropertiesweekly). However, Chomsky's argument does not depend on there being 'no new entrants', so this is a classic straw man argument. You might want to read some of BrianArthur's theories of economics (eg http://www.santafe.edu/~wba/Papers/Pdf_files/EJ.pdf ) - he believes that the pattern in many markets is one of lock-in. I reckon that because 'more popular' media can afford more comprehensive coverage the pattern may apply to media as well -- BrianEwins

As for taxes... Under the model I provide, taxes are a theoretical problem. Clearly, they are not a voluntary transaction and they are enforced through threat of violence. We could drop the requirement of a government protection from violence, but the problem is the situation degenerates into extortion by protectionist organizations (again, see Russia as an example). Therefore, we just accept the fact that the model isn't completely closed and console ourselves that it is better than any other model that exists. Obviously the government must be funded to provided non-coercive protection services. The only practical mechanism I know of to do this is taxes.

I say this is a theoretical problem because, in practice, it doesn't take very much money to provide the limited services required for capitalism: protection from coercive transactions. Anything else is outside the realm of the proper role of government and thus is considered a coercive transaction. This includes social services, road building, community buildings, etc. So, the practical effect of taxes is actually pretty small. Coupled with the fact that in the UnitedStatesOfAmerica, each state is in competition with the others for population and tax dollars (the same thing is likely to happen in Europe eventually). Thus, the cheaper each one can credibly provide the necessary services, they have a leg up on the competition.

-- MarkAddleman

Mark, that's nice that you managed to master CriticalSpirit, otherwise I was worry that we were too convergent, however there are some flagrant things where you are wrong.

People need only one thing to to become smart: feedback.

No . Let's play chess on the internet. I'll guarantee that you will lose time and time again thus getting negative feedback, and in abundance like you prefer. Still you won't get smart at chess. You need education to learn how to think about chess and access to information (the equivalent of access to the latest technologies).

On the positive side, the feedback tells investors where to put their money so they can make people happy.

If you are an investor, please put your money in my pocket, I'll guarantee you that I'll be happy. Investors will not seek the happiness of the society in general. Maybe you were trying to say that as a side effect of their actions towards maximizing their own profit, the society as a whole will advance (or some generous word like that).

There is no problem with an investor giving you (or anyone else) money, so long as the transaction is voluntary. This fits the model of capitalism. The moment the transaction becomes forced, we are no longer in the realm of capitalism. Because at least two parties are required for a transaction to take place and those parties are uncoerced, we can only assume they are participating because they expect the transaction to be beneficial to themselves (and, perhaps, others). Furthermore, because capitalism assumes that individuals are capable of making decisions for themselves better than anyone else, no outside person or group could make a better decision for those people involved in the transaction. Consequently, it is the best outcome possible. Since society is nothing more than a group of individuals having some set of commonalities, society is necessarily improved by virtue of this uncoerced transaction taking place.

The case where this logic breaks down involved externalities. There are occasions where a transaction involves more than those individuals engaging in it. In reality, externalities are typically the result of a breakdown in property rights or incomplete contracts. One example of insufficient property rights is early air-pollution in the UnitedStatesOfAmerica. Factories belched huge amounts of pollutants into the air because they had no incentive to keep the air clean. Had someone owned the air, they would have been able to either sue the polluters for damage to their property or the the parties would have engaged in some transaction to compensate for the damage. Of course, it is logistically impossible for someone to own the air.

The solution to this problem is a well known pattern in economics called InternalizeTheExternality?. In this case, the government determined a safe level of pollutants in some defined airspace. By determining the rate at which pollutants are dissipated, they were able to back into the rate at which pollutants could be put into the air. Then this rate was commoditized in the form of smog certificates. Essentially, each smog certificate conferred the right to pollute the air at a particular rate. The government then auctioned off these smog certificates.

Assuming that the rates determined by the government are, indeed, safe, everyone wins and capitalism is maintained without any more government interference than necessary to convey property rights.

Not to mention that if you introduced happiness into a formal model you're already arguing on suppositions and assertions. Not to mention that once you've lost your money (feedback) you are no longer investing. The money that were lost on Nasdaq (I heard there were some trillions) were in fact not lost at all, they only changed hands (Ok, some were literally lost but only a very small part). The ones that gained the money that were lost are unlikely to invest in anything else other than a palace on Riviera and stuff like that.

Another evidence about American education is that more than half of the post graduate students are immigrants (I'm not sure, I quote from memory). I have friends who teach and tell me horror stories. Not to mention the level of your high schools. I'm not sure what is exactly the status of American education but I don't think it's that easy to discard Chomsky's evaluation, after all he's in Academia so he has some kind of direct contact with this thing. -- CostinCozianu

Coming back to taxes for a moment... They are not always coerced. For example, no one forces me to pay a gas tax. I choose to pay it when I buy the gas. This is also true for toll roads and (to some extent) sales taxes. If more government services were fee-based, then the true costs of government services would be apparent to everyone, and the cost of a service would be carried primarily by those who use the service. --JosephStyons

moved to WhoMakesTheBetterDecision

http://www.mises.org/fullstory.asp?control=776&FS=A+Tribute+to+Trade

http://www.mises.org/fullstory.asp?control=777&FS=A+Modest+Craft

See FreeEnterprise.