Laissez faire capitalism is but a pipe dream.

Apologies for this Non HIT post, but these issues affect us all an post economic turmoil, its worth thinking about this. Economist who are usually champions of capitalism are also quick to point out some common weaknesses that have to be addressed.

Hirchman’s Exit vs Voice

This wonderful obituary to Albert Hirschman in the economist, summarizes his voting theory from his most famous book, “Exit, Voice and Loyalty: Responses to Decline in Firms, Organisations and States”. According to the theory, Mr Hirschman argued that people have two different ways of responding to disappointment. They can vote with their feet (exit) or stay put and complain (voice). Mr Hirschman raised some problems with the cult of exit. Sometimes, it entrenches the status quo. Dictators may rule longer if their bravest critics flee abroad (indeed, Cuba uses emigration as a safety valve). Monopolies may have an easier life if their stroppiest customers find an alternative.

So in disappointment, many give up ownership and no longer have influence to change the factors that brought about the disappointment.

Hardin’s Tragedy of the commons

In this well documented phenomenon first postulated by Garret Hardin in the journal science in 1968. Wikipedia summarizes the theory well;

“The metaphor illustrates the argument that free access and unrestricted demand for a finite resource ultimately reduces the resource through over-exploitation, temporarily or permanently. This occurs because the benefits of exploitation accrue to individuals or groups, each of whom is motivated to maximize use of the resource to the point in which they become reliant on it, while the costs of the exploitation are borne by all those to whom the resource is available (which may be a wider class of individuals than those who are exploiting it). This, in turn, causes demand for the resource to increase, which causes the problem to snowball to the point that the resource is depleted (even if it retains a capacity to recover). The rate at which depletion of the resource is realized depends primarily on three factors: the number of users wanting to consume the common in question, the consumptiveness of their uses, and the relative robustness of the common.[18]

In a nutshell, when a common resource has no ownership, there is little or no incentive to manage it.

Externalities

Externality as defined by Professor Jan Horst Keppler of the University Paris-Dauphine; “Externalities or external effects are goods that have an impact on welfare (positive or negative) that is not taken into account by the agent producing them” – I would have that this impact to cost or benefits are often left out in the transaction of buying and selling.

Often in a negative externality scenario, the market is unable to recognize the true cost of the good sold due to the lack of a feedback mechanism. Examples of this abound in environmental concerns – where the cost of the good does not factor in the cost of pollution or socio economic ills incurred to other anonymous stakeholders affected by this transaction.

So I’ve been thinking that the 3 issues mentioned above we see in capitalism have a common theme of a perversion of ownership. Sometimes what matters is not the same as what is valued in our selfish quest for utility and around incentives. In some parts of the world, culture plays a strong role to mitigate this. If there exist a culture of common ownership, then there will be a non monetary motivation to own and manage that which is subject to the perversion of our selfishness, apathy or greed. Another mitigating factor is information – when we truly understand true cost, or have constructs for collective ownership or a collaborative deep motivation to retain ownership despite disappointment, we can mitigate this natural inclination of the perversion of ownership. In any case, these issues inform me that there will always be a need for government and laissez faire capitalism is but a pipe dream.

21 thoughts on “Laissez faire capitalism is but a pipe dream.

  1. Very great post. I simply stumbled upon your weblog and wished to mention that I have really loved browsing your weblog posts. In any case I’ll be subscribing in your rss feed and I hope you write again very soon!

  2. I usually do not drop many remarks, but i did a few searching and wound up here Laissez faire capitalism is
    but a pipe dream. | H.I.T. Singularity. And I do have 2 questions for you if you don’t mind. Could it be just me or does it seem like some of these remarks appear as if they are written by brain dead individuals? 😛 And, if you are writing on additional online sites, I would like to follow anything new you have to post. Would you make a list of every one of your shared pages like your twitter feed, Facebook page or linkedin profile?

  3. Pretty nice post. I just stumbled upon your weblog and wanted to say that I have truly enjoyed surfing around your
    blog posts. In any case I will be subscribing to your rss feed and I hope you write again very soon!

  4. I blog quite often and I truly thank you for your content.
    This article has truly peaked my interest. I am going to book mark your
    site and keep checking for new information about once a week.
    I subscribed to your RSS feed too.

  5. Hey! This is kind of off topic but I need some advice from an
    established blog. Is it very difficult to set up your own
    blog? I’m not very techincal but I can figure things out pretty quick. I’m thinking about setting up my own
    but I’m not sure where to begin. Do you have any ideas or suggestions? Cheers

  6. Magnificent beat ! I would like to apprentice while you
    amend your website, how could i subscribe for
    a weblog website? The account helped me a acceptable deal.
    I have been tiny bit acquainted of this your
    broadcast offered bright clear idea

  7. Can I simply just say what a comfort to find somebody that
    really understands what they are talking about over the internet.
    You definitely understand how to bring an issue to light
    and make it important. More people must read this and understand this side
    of your story. I was surprised you’re not more popular because you definitely have the gift.

  8. Do you mind if I quote a few of your posts as long as I provide credit and sources back to your site?
    My blog is in the very same niche as yours and my visitors would really benefit
    from some of the information you present here. Please let me know if this okay with you.
    Appreciate it!

  9. Attractive portion of content. I just stumbled upon your web site
    and in accession capital to claim that I get actually
    loved account your weblog posts. Anyway I’ll be subscribing to your feeds and even I success you access persistently rapidly.

  10. Just wish to say your article is as astounding.
    The clearness for your publish is just great and that
    i can think you are an expert in this subject. Well together
    with your permission allow me to snatch your RSS feed to keep updated with impending post.
    Thank you a million and please keep up the rewarding work.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s