The Game of Capital
American capitalism has been so stable, for so long, that everyone has apparently forgotten what it is. Capitalism is presumed by both liberals and conservatives to be an ideology of total deregulation. That’s mistaken.
Capitalism is, and has always been, a game whose rules are designed and enforced by government to maximize the efficiency of capital allocation.
“What?” my laissez-faire readers argue. ”Capitalism has inherent rules?” No, they argue, capitalism is the totally free, utterly unfettered flow of capital. The rules are what get in the way.
“What?” my Bay Area friends argue. ”Capitalism has inherent rules?” No, they argue, capitalism is the unrestrained excess of the greedy. The rules are what keep them at bay.
These positions both misunderstand the history and definition of capitalism. Basic regulation — the rules that define incentives in the capital allocation game — are central. Capitalism cannot function without them. The objective is not to increase or decrease regulation, but rather to design a legal structure that maximizes the efficiency of capital allocation at minimum cost.
Consider: capitalism depends upon private ownership. But what does “ownership” mean? Property is, at its core, a form of monopoly granted and enforced by government. When you buy a house, what are you paying for? Exclusive use. Who protects that exclusivity? What stops your neighbor from crashing on your couch whenever he wants? Laws and police, paid for by tax. Private ownership cannot exist without this government sanction and enforcement. Thus regulation is inherent to capitalism.
This is a special case of the most general function of government: to assign individual costs and benefits to externalities, in a way that makes most people better off.
The cost of such assignment can easily exceed the benefits, which is why so much of the regulation of the 1960s and 1970s was wasteful and counterproductive. This set the stage for a conservative backlash that is only now running out of steam, as it hits the problems that exist at the other end of the regulatory scale. As posted here years ago, Baja California demonstrates how poorly under-regulated capitalism works.
In the US, wasteful regulation and counterproductive deregulation are both driven mainly by politicians born before 1960, who, as posted here previously, grew up in conditions of essentially unlimited American power, stability and financial resources, and thus never developed the judgment necessary to make decisions under conditions of limited resources.
With the passing of the torch to a new generation that grew up with declining living standards and American balkanization, we may reasonably hope for better cost/benefit analysis.
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November 6th, 2008 at 5:34 pm
Not to disagree, but your definitions omit
http://en.wikipedia.org/wiki/Anarcho-capitalism
Of course even Ayn Rand saw the problems with this:
“[S]uppose Mr. Smith, a customer of Government A, suspects that his next-door neighbor, Mr. Jones, a customer of Government B, has robbed him; a squad of Police A proceeds to Mr. Jones’ house and is met at the door by a squad of Police B, who declare that they do not recognize the authority of Government A. What happens then? You take it from there.”
http://stason.org/TULARC/ideology/anarchy/11-c-The-minarchists-attack-on-anarcho-capitalism.html
November 6th, 2008 at 6:05 pm
Anarcho-capitalism disproves itself:
From Wikipedia: “elimination of the state and the provision of security from aggression against person and property by the private sector in a free market.”
The latter is essentially a proto-government. The contract between individuals and their private-sector security will very quickly come to resemble paying taxes in return for enforcement of a code of laws. Then the contractees will want the ability to change those laws. Perhaps they will decide by majority vote. Now you have democracy. So “anarcho-capitalism” seems nonsensical.