Truly Creative Capitalism

The true power of capitalism is its ability to take the basest of human instincts - greed and selfishness - and transform them into an engine that generates wealth, innovation and prosperity for the entire society. 

Truly creative capitalism would discover a method to use the powerful forces of self-interest to incent the despotic and authoritarian leaders of the poorest countries to embrace the power of markets.   It will take a wiser man than I to find such a system, but I can imagine how such a system might work.

Perhaps it is a betting-market based on the GDP growth of a nation in which the rulers get a controlling share.  Perhaps the leader would collect a percentage of all taxes generated from business.  Either way, if  such a leader could be convinced that they would become wealthier and more powerful by letting their nation prosper as opposed to simply stealing whatever they wanted a win-win situation might be created.

Without creating the incentives for these authoritarians to make institutional changes within their countries I fear that any effort by the developed nations or Creative Capitalists will simply be throwing good money after bad.  It may help a little today, but shouldn't creative capitalism really be striving to make long term advancements in wealth that only changes in institutions will really achieve?

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Fed Prevents Last Failure

The Fed announces new rules on lending practices that, if implemented a decade ago - would have prevented the mortgage 'crisis'.

To prevent a repeat of the current mortgage mess, Bernanke said the Fed will adopt rules cracking down on a range of shady lending practices that have burned many of the nation's riskiest "subprime" borrowers — those with spotty credit or low incomes — who were hardest hit by the housing and credit debacles.

The plan, which will be voted on at a Fed board meeting on Monday, would apply to new loans made by thousands of lenders of all types, including banks and brokers.

Under the proposal unveiled last December, the rules would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower's income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.

For what it's worth, I actually don't have an issue with the last item.  Much of the mess, as I understand it, was caused by the mistaken belief that housing prices never - or perhaps can't - fall.  Allowing buyers to take out loans without even asking them to state income or asking them how they plan to repay the loan was the worst sort of negligence.

As for the rest, most of it appears to be relatively minor meddling, though I'm not overly thrilled with it.  Of course, the devil is in the details.  What is a "risky" borrower?  And why does the government get to decide whether I have to escrow my taxes or save for them on my own?

The one open question is what will prohibiting early payoff penalties do to the market?  Are these penalties common?  Are they only imposed on certain classes of borrowers?  Will the inability to collect these penalties push rates higher to cover the loss or will additional closing fees be added to collect the penalty from every borrower instead of just those that pay off early?

Technorati Tags: economics,housing

Does Oil Have an Income Effect?

Given that the oil is an inelastic commodity in the short term given that there are not a lot of substitutes and little opportunities to not consume oil.  Could it cause changes similar to changes in income for other goods and services?

Technorati Tags: economics

Principles 9 and 10

I promised to share my views on Mankiw's 10 Principles of Economics and have hit a bit of a roadblock with the last two.  I don't really have much to say.

9: Prices Rise When the Government Prints Too Much Money
10: Society Faces a Short-Term Trade-off between Inflation and Unemployment

I suppose they are true.  It makes sense that they are true.  But in today's modern economy where the people in positions to do something about it does it really matter anymore?

I guess in the sense that you have to cover the basics before you get to the meaty stuff it may.  Can anyone convince me that I am wrong?

Technorati Tags: economics,school

How Useful Is Economics?

My professor insists that it is possible to determine the shift in a demand curve given some change in technology, supply or other variable.

I overstated my case stating that these were guesses (highly educated guesses, I would have been better off saying estimates) and that it isn't possible to 'know' what the new demand curve would be until you could observe it.

What are your thoughts? Is it possible to know what a demand curve will be if you change certain determinants?

Tags: economics, school

More on Creative Capitalism

I was just re-reading Ed Glaeser's essay on creative capitalism.  He talks about several examples of private social entrepreneurship.  But each of these examples are individual efforts or non-profit organizations.

He talks about Herbert Hoover's efforts to feed Belgium after WWI.  But that was a philanthropic organization that raised funds through voluntary donations.

He mentions the National Institutes of Health, a government institution, and points out that the private sector provides the innovation in the medical field because the government is unable to take the appropriate risks necessary to make bold discoveries.

He then mentions Rockefeller's efforts to eradicate hookworm in the south.  The problem is that these are not "creative capitalists" in the way that Gates spoke about in the speech that launched the site.  They are a wealthy philanthropist, profit maximizing firms and a wealthy (oft demonized) philanthropist respectively.

If Glaeser is really making a call to arms for hyper wealthy individuals to do what they can to help the poor why not just come out and say so?  The only connection to capitalism that the first and third example provide is that these individuals were able to create enormous wealth and use their private wealth afterwards to help others.

If this is what creative capitalism really means, there isn't anything to do because this is already the way that capitalism works.

Technorati Tags: economics,capitalism

A Country's Standard of Living Depends on Its Ability to Product Goods and Services

If Standard of Living is narrowly defined as the ability to buy more stuff, I would say that this is generally correct.  Of all of the principles, this one is really the most subjective and could be described another way.

If a benevolent dictator knew no more about economics other than this principle what would happen?  China put a steel furnace in every backyard, if the plan had worked and China had successfully produced more steel than any nation on earth - would that have increased the Chinese standard of living?

Of course not, the standard of living depends on producing quality goods and services that people actually want.  And even that alone isn't enough.  The principle doesn't state it explicitly, but there seems to be an implicit suggestion that producing more stuff will raise the standard of living.  Even that isn't true - standard of living is a very subjective term. 

Say that there are two countries.  Country A is centrally controlled - they somehow figured out to match and even exceed the productivity of the typically laissez faire market, producing 25% more 'stuff' than Country B.  However, Country A also controls every aspect of private life as well, decide which stuff they can buy, how they use it, who they can associate with, when they travel and to where, what their job will be.

On paper, it appears that Country A is wealthier than Country B, but is their standard of living really any better?

I understand what Mankiw is getting at - the more successful the market, the better off its people tend to be.  What would be a better way to state this principle?

Technorati Tags: economics

Why Isn't Success Good Enough

There is a very interesting conversation going on over at Creative Capitalism. I haven't made it through everything yet, but what I have read so far is quite good.

Ed Glaeser writes "Mr. Gates’ speech reminds us that while laissez-faire capitalism has worked many miracles, it has never been particularly well targeted towards righting social inequities."

Why focus on the inequities instead of capitalism incredible adeptness in making life better for everyone, including and especially the poor?

There are hundreds of millions of Chinese and Indians that have been lifted out of abject poverty within a generation because of the power of capitalism. That is truly astonishing - why isn't this good enough? What hubris is required to think that an individual or individuals could improve upon the spontaneous order of capitalism?

Technorati Tags: economics,capitalism

Governments can Sometimes Improve Market Outcomes

I really, really, really wish that Mankiw had added two words.  "In Theory"

In reality, market failures are defined as "outcomes I don't like" and externalities are defined so broadly as to have no meaning at all.

So yes, government can, in theory, improve market outcomes, I just don't trust the lot of economically illiterate, moral degenerate scumbags currently in office do actually do so.

Technorati Tags: economics,politics

Markets Are Usually a Good Way to Organize Economic Activity

If only this were as self-evident to everyone else as it is to me.

Look at the economies that are not organized into markets: Cuba, North Korea, the former USSR.  Not exactly places people were clamoring to get into were they?

And look at the examples here in the US: primary education is roundly, and correctly, criticized for being crappy - yet secondary education, which is organized as a market, is the best in the world.  Utilities & infrastructure are state-run monopolies (or regulated to the point that they might as well be) and continue to age, decay and not meet the lowest of expectations.

There isn't really an easy way to get where we are to a market in some of these areas, but I firmly believe that if we could get there life would be much better in many ways.

Instead we have economic illiterates clamoring for the nationalization of the oil industry and increased government interventions in everything from health care to the futures market.

If only politicians had to pass a remedial economics course before taking the oaths of office.

Technorati Tags: economics,politics